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Accounting for Start Ups has never been easier but there’s still a vital role for a Finance Director

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One of the many pleasant surprises I’ve learnt over the past 18 months or so as a freelance Finance Director is how much online accounting systems have moved on.

I’ve always counted my blessings I’ve worked more in Excel than Kalamazoo. The speed, ease and accuracy with which you can manipulate data has taken a lot of the drudgery out of the FD role.

The explosion of new, simple and exceptional value online products such as Xero, FreeAgent and KashFlow has had the same effect on accounting systems for the start-up entrepreneur. They enable anyone’s accounts to be on a robust platform from day 1.

Being able to log on wherever you are to check on the cash position or raise an invoice for work you’ve just done makes accounting easier, flexible and more relevant.

So far, so bleak for the accountant whose role could be marginalised to the annual accounts and tax computation. However there is a real opportunity for the Finance Director to become a trusted business advisor.

Naturally I’m a little biased here but no matter how simple and easy it is to process transactions or pay suppliers there is always going to be an important role for an FD who can explain not only why the numbers are what they are and ways they could be improved.

It is this added value role which can’t be replaced (yet) by software. In fact having the right software at the right time and cost should mean the time saved on the more day to day functions should mean a greater focus what the numbers mean.

Getting that advice and insight in a cost effective package is what I’m about. One of the things that can improve the chances of a small agency surviving and thriving is getting good, practical advice from an experienced, flexible and cost effective Finance Director. If this sounds interesting contact me.

“It measures everything, in short, except that which makes life worthwhile”

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Robert Kennedy on GDP

Why you need more than a P&L to understand Agency profitability – Part 2

Part 1 made the point about how you need a broader set of metrics than just a P&L to order to understand why an Agency is profitable.

Beneath the comforting familiarity of the revenue and costs of a typical Agency P&L there are forces at work which will influence long term success. A Finance Director needs to measure these factors in order to help manage long term Agency profitability.

I covered the importance of the pipeline and conversion for new business success and longer term revenue generation. Keeping tabs on the reasons for staff churn can help retain client and agency knowledge and keep recruitment costs down.

Beyond these metrics there are some other really useful measures that will help you understand the shape and direction of your Agency.

Something as simple as an Excel Invoice register will enable you to analyse your revenue in a number of really interesting ways. It’s easy to get carried away but here are a few simple but powerful measures that will add depth and insight to your monthly reporting.

i) Building long term, profitable client relationships is vital but if you don’t measure it how can you manage it? Average client tenure is a simple way to track if your clients are still happy enough to continue paying you.

ii) What percentage of the total revenue do your 5 biggest clients contribute? It’s always easier to grow off the back of a single, strong client but the trade-off is over dependence on one relationship. Having a wider spread of clients is always safer. A sensible target is having about 50% – 60% of revenue from your 5 biggest clients and no one client accounting for more than 20% of total revenue.

iii) The split between retainers and projects is easy to track too and tells you a lot about your agency. This is a nuanced area and will vary from sector to sector but generally speaking it is helpful to have a solid base of monthly fees topped up by additional project activity. What the optimum split should be is something that needs a little thought – I’ve seen 80:20 both ways work OK.

iv) Measuring growth in revenue between new business and net organic growth is also pretty straightforward. Winning new business and then growing that business through performance is the goal. Having both contributing equally to growth is ideal – a year on year 50:50 split is a good target.

The above are by simple to measure. Simple organisation of revenue in a click and filter spreadsheet and a few Sum if formula can make a powerful difference to the insight you can bring to bear on the monthly reporting.

I’m an experienced FD of marketing services agencies. If you’d like an initial chat about how I could help your agency be more profitable then please contact me on simon@novemberfriday.wpengine.com .

How a kludge can help manage your agency finances.

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Definition: A kludge is a workaround, a quick-and-dirty solution, a clumsy or inelegant, yet effective, solution to a problem, typically using parts that are cobbled together. This term is diversely used in fields such as computer science, aerospace engineering, internet slang, and evolutionary neuroscience.

Agency finances and financial systems can get very complicated, very quickly. The data available to analyse can grow exponentially leaving your head swimming and no better informed about the state of your finances.

Now, a good accounting system will solve this in the long term. Set up correctly to reflect how your agency operates it can give the right level of detail to the right people at the right time.

However if your budget can’t stretch to a new accounting system at the moment there are manual fixes that can give you enough information to help manage your Agency better.

An excel sales invoice register can break down your revenue and generate departmental P&Ls. Headcount numbers can give you a simple recovery analysis. Media commission can work out an approximate cost of sales accrual. If needs be a trial balance model can even generate monthly accounts from Sage50.

I’ve used all of the above (with a few others) to give some clarity and direction to Agency finances. My preference is always for a solidly based and integrated accounts and job costing system. This takes some time though and if you need some management accounts by tomorrow you’ll need a well designed kludge or two to get you through.

A word of caution though. I’ve seen spreadsheets that started with the best of intentions but then veered crazily out of control. Be especially careful if they are open to the entire agency.

Luckily for me what to focus on and what the information means and when to move to a more robust system means my role isn’t made redundant by a spreadsheet no matter how good it is.

If you’d like to know more about how I can help your Agency become more profitable with or without a kludge then contact me on simon@novemberfriday.wpengine.com

The 4 R’s of being an Agency Finance Director.

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There are many ways to look at Agency profitability. From the top down you can look at revenue to resource ratios. From the bottom up you can look at actual versus estimated costs.

The first approach in my opinion is too removed whilst that latter can be too detailed. With a hefty nod to the 3 R’s of my school days I think the following R’s brings together a way of focusing on profitability that brings together the top down and bottom up approach so that the Agency FD can have a positive impact on the margin.

 Rates and Recovery

Under recovery of hours is the silent killer, it’s the equivalent of high blood pressure for Agencies. Work more hours than you can charge and watch your margin dwindle away before your eyes. Recovery rates by department, by client gives you an incredible insight into estimating accuracy and operational efficiency.

It also gives you the perfect tool to talk to the only people who can make a real, short term change to company profitability; whoever puts the estimate together. They need to know if  creative or production is regularly undercharged. You need to tell them and help support the client negotiation that might follow.

Under recovery may also be the result of operational inefficiency and you will need to work with department heads to understand if it is our under estimation of time or inefficient delivery that is the problem.

The importance of rates is self evident. However the interplay with recovery is interesting. Rates should always be backed by a salary cost/overhead/margin calculation (but ultimately determined by negotiation). In the cost calculation though you must make an allowance for unrecovered time, typically using 70% as a benchmark for time to be recharged.

The effect of recovery on margin becomes very clear when you do this calculation. A healthy 20% margin at 70% utilisation/recovery becomes a less than impressive 7% at 60%.

One effect of this basic maths is that it can cover up an issue with recovery. When I first started banging on about recovery it became very clear, very quickly that high margins didn’t necessarily mean high recovery. In fact high margins that relied on a more generous rate card nearly always covered up a recovery problem.

Either subconsciously or knowingly high rates encouraged over servicing and therefore low recovery. Maybe this is the right thing to do but I would always, always advocate knowing what your over servicing is. At the very least make sure your client is aware. There may come a time when there will be pressure on rates as well as an expectation of continuing service levels.

Risk

Life is full of risk. Each new project or new client has a risk. A project may overrun or a client not pay. A project which falls squarely into the core competence of the agency is low risk when compared to a more complex project that requires new skills or methodologies.

The Finance Director needs to be proactive in assessing risks. Credit checks on new clients should be taken and significant new projects assessed for risks. Factors which affect project risk are straight forward; new technology or project management methodologies increase risk as does the size and complexity of the deliverables. Timelines are important as well as the experience of the project team.

Steps to minimise risk at the outset will help preserve margin in the long run. Making sure that senior management is aware of the risk is vital if they are to sign off the upfront investment that might be required to ensure the risk is minimised.

We should always learn from our mistakes and never again will I let, say, a major website build go ahead without thinking about how it could go wrong and what we can do to make sure it doesn’t. The loss in margin spent correcting early mistakes in planning far, far outweigh the additional initial cost.

Resource

Having the right number of people with the right mix of skills doing the right things at the right time is the very definition of success. Get one of these factors wrong will have a knock on effect that will result in lower margins.

Look for constant use of freelancers. If you always have freelancers for core skills maybe you need to recruit. If you need freelancers for specialist skills then is there enough volume of work to recruit or would they enable the rest of the team to work more efficiently?

You should also look at the seniority and experience of the team. Too senior and either your margin or your competitiveness will be affected. Too junior and too much weight will be placed on the team lead.

Managing agency finances is a juggling act. I think these 4 R’s help manage them a little more effectively. Assess risks upfront, monitor recovery rates and review resource levels and you will have a positive impact on the margin.

The author, Simon Collard, has managed finance departments in the Marketing Services sector for 18 years. If you would like a chat if you need some help or advice please contact him on simon@novemberfriday.wpengine.com.

Budget setting – art or science?

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This is my second attempt at writing this article. The first effort started off as a worthy piece about how the numbers and strategy needed to work together. By the fourth paragraph though I’d bored myself and I figured it would have done the same to anyone reading it even earlier.

This is odd as the budget is probably the most important document an Agency FD can produce but writing about it in a theoretical way seemed like preaching to the choir, worthy and all, but isn’t going to change any minds.

What I settled on as being hopefully more interesting is some do’s and don’ts drawn from my years of getting budgets wrong. This is no false modesty, every budget that everyone has ever set has been wrong from the moment the paper cooled from the printer. Budgets are not about getting a right or wrong number they are about the direction of travel. What repeat business do you expect? What is a sensible new business target? How much can you afford to spend on training versus marketing versus anything else you’d like.

It’s important to say here that this is about budget setting for independents. For group companies save time and frustration by asking Head Office what number they would like.

Assuming that you do have control over the budget process what are some of the obvious mistakes to avoid in order to make the budget if not correct then relevant for a little bit longer?

The most obvious mistake to avoid is to be very careful of a client budget which increases dramatically year on year, especially if a relaunch is mentioned. I’m not saying it’s not going to happen but it’s a warning flag – dig a little deeper, ask whether the overall budget including TV, direct, digital has been signed off. It’s very tempting to grab hold of this offering from the Account Director as it will go a long way to helping set an increased target. We all like a higher target but do your due diligence first. I’ll not make that mistake again.

The next obvious mistake is to avoid setting an unrealistic new business target. It’s tempting to add a little extra new business to support a target. Don’t set a new business target out of kilter with last year’s achievement. Even if the year before was a really good one for new business that was over a year ago, new business tends to be a form game with streaks of success or failure. It’s not sensible to forecast a radical change in luck/chemistry or whatever it is that affects pitch success.

I’ve struggled with forecasting freelancers too. It’s tempting to believe next year you will need fewer freelancers than this year. You can identify resource shortages and invest in new people but the odds are freelancers will remain stubbornly high. This is mainly down to the fact that these resource problems and potential solutions are constant and unless you are doing something radically different as a business, business as usual will apply. The same principle applies to recruitment as well. If your churn rate was 20% last year is it sensible to budget for a lower rate this year?

Another danger I try to avoid is either being too uniformly optimistic or pessimistic. There are always going to be potential upsides in client spends just as there are risks to forecasts. I like to look at revenue budgets with the possible upsides and downsides all together. That way I can make sure I’m not including all the additional revenue and assuming we won’t lose any business. Or vice versa. Life is not like that.

There is one difficult judgment that has to be made when there is a re-pitch for an existing client. If the result is not going to be known until well into the new financial year what do you do? I’ve faced this a number of times and the conclusion I’ve come to is that the odds on retaining the business are not good enough to encourage me to live with the results for the next year. I would assume you’re going to lose the client or prepare two versions, one for each outcome. One final idea on the revenue side is that whilst we usually forecast new business how often do we include a revenue attrition figure?

So, try not to get carried away with potential good news, be realistic about new business and freelancers, balance risks and think about an attrition rate and take the hard call to omit any clients which are re-pitching. Even if you take these steps your budget won’t survive the first contact with reality but it will be based on what has happended and will point in the right direction.

Despite the hard choices and the inevitable inaccuracies I’m a huge, huge fan of budgets. I do love doing them.  They are neither art nor science but it is a chance for the FD to have a real impact on the plans of their Agency. It is the platform to make choices about resource, costs, investments, operations. The more planning, the more analysis you do the more useful the budget will be.

The author, Simon Collard, has set budgets for marketing service Agencies for nearly 20 years. Despite never getting one entirely right his optimism remains undimmed. If you need help putting together your budgets and reforecasts please email me on simon@novemberfriday.wpengine.com.